Pricing Policy and Price Sensitivity

Pricing Policy

• A pricing policy defines a company’s approach to setting product or service prices.
• It includes strategies, guidelines, and factors influencing pricing decisions.
• Legal regulations exist to prevent unfair competition, price discrimination, and monopolistic practices.
• Apple uses value-based pricing for its products like the iPhone and MacBook.
• Pharmaceutical companies frequently use value-based pricing for new medications, especially innovative treatments.
• Luxury brands like Louis Vuitton employ value-based pricing to reflect exclusivity, craftsmanship, and prestige.

Price Sensitivity

• Commoditized markets are highly price-sensitive due to minimal perceived differences between competing products.
• Commoditization leads to price wars, where companies continuously lower prices to attract customers.
• Standardization of features diminishes perceived uniqueness when products offer similar benefits across providers.
• Commoditization reduces profit margins, erodes brand loyalty, and increases pressure on innovation.

Avoiding Commoditization

• To avoid commoditization, companies should focus on innovation, branding, and customer experience.

Discounting to Compensate for Past Failure

• It's a strategy where companies offer a discount or price reduction to compensate customers for previous mistakes, service failures, or product defects.
• This approach is often used as a customer service recovery effort to regain trust, retain customers, and demonstrate accountability.
• The discount aims to make amends for errors and serve as a goodwill gesture to show customer appreciation.
• It can also be used to enhance customer loyalty and rebuild trust in the brand.

Key to Profitable Pricing

• Profitable pricing involves not only setting the right price at the right time but also ensuring these decisions support long-term objectives and lead to sustainable profitability.

Measurement of Price Sensitivity

• Understanding price sensitivity helps businesses set optimal prices and develop effective pricing strategies by measuring the degree to which changes in price influence consumer behavior.
• Price elasticity of demand quantifies the responsiveness of quantity demanded to price changes by dividing the percentage change in quantity demanded by the percentage change in price.
• Elasticity values greater than 1 (absolute terms) indicate high price sensitivity, while values less than 1 suggest lower sensitivity.

Methods to Measure Price Sensitivity:

• Surveys: Gather insights by directly asking consumers about their willingness to pay and purchasing behavior in response to price changes.
• Experiments: Use A/B testing, adjusting prices and observing resulting sales changes.
• Historical Sales Data Analysis: Analyze past data to understand the relationship between price and sales volume.

Transactional Data Analysis

• Combining store scanner data with panel data tracking consumers' demographics and behavior provides insights into price sensitivity and purchasing patterns.
• While transactional sales data are prevalent in consumer goods markets, business-to-business markets often lack sufficient data.
• Overlaying quote history with actual sales success data helps estimate the likelihood of achieving a sale at different price levels.

Experimentally Controlled Studies of Actual Purchase

• Researchers can generate experimental purchase data by conducting pricing experiments in stores or labs.
• This method allows researchers to control price variations and hold other marketing variables constant, minimizing external effects.
• It permits researchers to examine the effects of different prices and establish controls to account for external factors.

Explore the concepts of pricing policy and price sensitivity in the market. This quiz covers various strategies companies use to set prices, including value-based pricing and the impact of commoditization on consumer choice. Learn how legal regulations shape pricing decisions and affect competition.